<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE COMMISSION ACT OF 1934
For the transition period from to
------------------- ----------------------------
Commission file number 1-6339
------------
PRATT HOTEL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1295630
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
- --------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 386-9777
--------------------
(NOT APPLICABLE)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1996
----- --------------------------------
COMMON STOCK, $.10 PAR VALUE 5,186,627 SHARES
1
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- -----------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Pratt Hotel Corporation, a Delaware corporation, and its subsidiaries
("PHC") are engaged primarily in the ownership, operation and management of
casino/hotels and hotels in the United States; the management of a riverboat
gaming facility located in Aurora, Illinois (the "Aurora Casino") and providing
consulting services to a gaming facility in Tunica County, Mississippi (the
"Tunica Casino"). Approximately 20% of PHC's outstanding common shares are
listed and traded on the American Stock Exchange under the symbol PHC. The
remaining 80% of the common shares of PHC are owned by Hollywood Casino
Corporation ("HCC"), a Delaware corporation which is approximately 53% owned by
certain general partnerships and trusts controlled by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by other family members (collectively, the
"Pratt Family"). The remaining outstanding HCC common shares are listed and
traded on the NASDAQ under the symbol HWCC.
A significant portion of PHC's assets relate to its wholly owned
subsidiary, Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands
Hotel and Casino located in Atlantic City, New Jersey (the "Sands").
Historically, the Sands' gaming operations have been highly seasonal in nature,
with the peak activity occurring from May to September; consequently, the
results of operations for the three and nine month periods ended September 30,
1996 are not necessarily indicative of the operating results for the full year.
The consolidated financial statements as of September 30, 1996 and for the
three and nine month periods ended September 30, 1996 and 1995 have been
prepared by PHC without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position of PHC as of September 30, 1996, the results of its
operations for the three and nine month periods ended September 30, 1996 and
1995 and its cash flows for the nine month periods ended September 30, 1996 and
1995.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in PHC's 1995 Annual Report on Form 10-K.
2
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,816,000 $ 28,067,000
Short-term investment 2,000,000 -
Accounts receivable, net of allowances
of $15,288,000 and $16,496,000,
respectively 11,442,000 12,293,000
Inventories 4,024,000 4,462,000
Due from affiliates 2,387,000 2,435,000
Deferred income taxes 1,478,000 4,055,000
Refundable deposits and other
current assets 4,041,000 2,597,000
------------- -------------
Total current assets 50,188,000 53,909,000
------------- -------------
Property and Equipment:
Land 38,671,000 37,807,000
Buildings and improvements 185,508,000 185,077,000
Operating equipment 90,558,000 92,474,000
Construction in progress 3,197,000 2,450,000
------------- -------------
317,934,000 317,808,000
Less - accumulated depreciation
and amortization (158,665,000) (148,531,000)
------------- -------------
Net property and equipment 159,269,000 169,277,000
------------- -------------
Other Assets:
Obligatory investments 5,999,000 5,521,000
Deferred financing costs 7,924,000 8,730,000
Notes receivable - 9,222,000
Other assets 4,441,000 3,457,000
------------- -------------
Total other assets 18,364,000 26,930,000
------------- -------------
$ 227,821,000 $ 250,116,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 5,000,000
Short-term credit facilities 2,000,000 -
Current maturities of long-term debt 2,735,000 553,000
Accounts payable 8,861,000 9,432,000
Accrued liabilities -
Salaries and wages 5,077,000 5,454,000
Interest 10,444,000 11,856,000
Insurance 3,020,000 2,339,000
Other 7,323,000 6,442,000
Other current liabilities 4,001,000 4,855,000
------------- -------------
Total current liabilities 50,211,000 45,931,000
------------- -------------
Long-Term Debt 330,166,000 328,570,000
------------- -------------
Other Noncurrent Liabilities 6,370,000 8,747,000
------------- -------------
Due to Affiliate 5,283,000 5,283,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,186,627 shares issued and outstanding 519,000 519,000
Additional paid-in capital 23,783,000 23,783,000
Accumulated deficit (188,511,000) (162,717,000)
------------- -------------
Total shareholders' deficit (164,209,000) (138,415,000)
------------- -------------
$ 227,821,000 $ 250,116,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Revenues:
Casino $ 65,820,000 $72,235,000
Rooms 3,817,000 3,938,000
Food and beverage 9,532,000 10,286,000
Other 4,690,000 4,892,000
------------ -----------
83,859,000 91,351,000
Less - promotional allowances (7,462,000) (7,913,000)
------------ -----------
Net revenues 76,397,000 83,438,000
------------ -----------
Expenses:
Casino 56,240,000 55,998,000
Rooms 1,043,000 1,096,000
Food and beverage 3,605,000 3,503,000
Other 1,741,000 903,000
General and administrative 4,557,000 4,939,000
Depreciation and amortization 5,189,000 5,112,000
------------ -----------
Total expenses 72,375,000 71,551,000
------------ -----------
Income from operations 4,022,000 11,887,000
------------ -----------
Non-operating income (expense):
Interest income 462,000 623,000
Interest expense (10,073,000) (9,758,000)
(Loss) gain on sale of assets (625,000) 56,000
------------ -----------
Total non-operating expense, net (10,236,000) (9,079,000)
------------ -----------
(Loss) income before income taxes (6,214,000) 2,808,000
Income tax provision (1,457,000) (465,000)
------------ -----------
Net (loss) income $ (7,671,000) $ 2,343,000
============ ===========
Net (loss) income per common share $(1.48) $.45
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Casino $188,735,000 $202,571,000
Rooms 11,107,000 11,149,000
Food and beverage 27,693,000 25,828,000
Other 14,253,000 12,435,000
------------ ------------
241,788,000 251,983,000
Less - promotional allowances (21,616,000) (20,267,000)
------------ ------------
Net revenues 220,172,000 231,716,000
------------ ------------
Expenses:
Casino 169,156,000 157,060,000
Rooms 3,644,000 3,726,000
Food and beverage 9,749,000 8,501,000
Other 3,773,000 2,725,000
General and administrative 14,876,000 16,436,000
Depreciation and amortization 15,790,000 15,415,000
------------ ------------
Total expenses 216,988,000 203,863,000
------------ ------------
Income from operations 3,184,000 27,853,000
------------ ------------
Non-operating income (expense):
Interest income 1,565,000 1,794,000
Interest expense (29,813,000) (29,290,000)
(Loss) gain on sale of assets (612,000) 56,000
------------ ------------
Total non-operating expense, net (28,860,000) (27,440,000)
------------ ------------
(Loss) income before income taxes (25,676,000) 413,000
Income tax provision (118,000) (742,000)
------------ ------------
Net loss $(25,794,000) $ (329,000)
============ ============
Net loss per common share $(4.97) $(.06)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(25,794,000) $ (329,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 21,168,000 20,458,000
Provision for doubtful accounts 1,562,000 2,263,000
Loss (gain) on sale of assets 612,000 (56,000)
Deferred income tax provision (benefit) 51,000 (501,000)
Increase in accounts receivable (709,000) (735,000)
(Decrease) increase in accounts payable and other
accrued liabilities (579,000) 595,000
Net change in other current assets and liabilities (1,948,000) 1,070,000
Net change in other noncurrent assets and liabilities (216,000) 828,000
------------ ------------
Net cash (used in) provided by operating activities (5,853,000) 23,593,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (7,237,000) (16,311,000)
Collections on notes receivable 9,361,000 77,000
Proceeds from disposition of assets 2,581,000 -
Obligatory investments (2,248,000) (2,102,000)
Short-term investment (2,000,000) -
Investments in and advances to unconsolidated affiliates - (1,125,000)
------------ ------------
Net cash provided by (used in) investing activities 457,000 (19,461,000)
------------ ------------
FINANCING ACTIVITIES:
Issuance of long-term debt 700,000 -
Net borrowings on credit facilities 2,000,000 -
Net borrowings from affiliate 1,750,000 -
Repayments of long-term debt (2,295,000) (5,867,000)
Deferred financing costs (10,000) (32,000)
------------ ------------
Net cash provided by (used in) financing activities 2,145,000 (5,899,000)
------------ ------------
Net decrease in cash and cash equivalents (3,251,000) (1,767,000)
Cash and cash equivalents at beginning of period 28,067,000 29,302,000
------------ ------------
Cash and cash equivalents at end of period $ 24,816,000 $ 27,535,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Pratt Hotel Corporation, a Delaware corporation, and its subsidiaries
("PHC"), are engaged in the operation or management of casino and hotel
properties. PHC's principal assets are the Sands Hotel and Casino located in
Atlantic City, New Jersey (the "Sands") and management and consulting contracts
with gaming facilities located in Aurora, Illinois (the "Aurora Casino") and
Tunica, Mississippi (the "Tunica Casino") (see Note 5). PHC's other operations
in the United States, including various ventures in which PHC has an interest,
are managed by PHC or its subsidiaries. Hollywood Casino Corporation ("HCC"), a
Delaware corporation which is approximately 53% owned by certain general
partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt and by other family members (collectively, the "Pratt Family")
owns approximately 80% of the common stock of PHC.
PHC estimates that a significant amount of the Sands' revenues is
derived from patrons living in southeastern Pennsylvania, northern New Jersey
and metropolitan New York City. Competition in the Atlantic City gaming market
is intense and management believes that this competition will continue in the
future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PHC is self insured for a portion of its general liability, certain
health care and other liability exposures. Accrued insurance includes estimates
of such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, PHC's ultimate liability
may differ from the amounts accrued.
During the fourth quarter of 1995, PHC adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result of its
review, PHC does not believe that any material impairment currently exists
related to its long-lived assets.
The consolidated financial statements as of September 30, 1996 and for
the three and nine month periods ended September 30, 1996 and 1995 have been
prepared by PHC without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of PHC as of September 30, 1996, the results of its operations for the
three and nine month periods ended September 30, 1996 and 1995 and its cash
flows for the nine month periods ended September 30, 1996 and 1995.
8
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
As of April 30, 1996, a subsidiary of PHC extended $2,000,000 of its
bank line of credit until April 30, 1997. As of September 30, 1996, $2,000,000
was outstanding under the line of credit; no such borrowings were outstanding
under the line of credit at December 31, 1995. Borrowings under the line of
credit accrue interest at the bank's prime rate plus 3/4% per annum payable
monthly and are guaranteed by another subsidiary of PHC. Additionally, the
guarantor has pledged a certificate of deposit in the face amount of $2,000,000
as collateral for the line of credit; such deposit is presented as a short-term
investment in the accompanying consolidated financial statements.
PHC and its subsidiaries had outstanding affiliate borrowings from HCC
of $7,750,000 and $6,000,000, respectively, as of September 30, 1996 and
December 31, 1995. Of the amounts borrowed, $1,000,000, which is not due until
April 1, 1998, is classified as noncurrent in the accompanying consolidated
balance sheets at September 30, 1996 and December 31, 1995. In addition,
$250,000 is due on demand, or if no demand is made, on April 1, 1998. Such
borrowings from HCC bear interest at the rate of 14% per annum, payable
semiannually. During the third quarter of 1996, a subsidiary of PHC borrowed an
additional $6,500,000 from HCC on a demand basis with interest at the rate of 13
3/4% per annum payable quarterly commencing October 1, 1996. Noncurrent
borrowings from HCC at December 31, 1995 also included $4,750,000 due in May
1997 and secured by a pledge of certain notes receivable from a partnership
owned by certain members of the Pratt Family. Such borrowing was repaid in
September 1996 with a portion of the proceeds from the sale of the underlying
hotel property (see Note 5).
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of PHC's assets are pledged in connection with PHC's
long-term indebtedness.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $185,000,000 $185,000,000
11 5/8% senior notes, due 2004 (b) 85,000,000 85,000,000
14 5/8% junior subordinated notes, due 2005 (c) 8,738,000 8,738,000
14 7/8% secured promissory note, due 2006, net of
discount of $45,932,000 and $51,310,000, respectively (d) 52,421,000 47,043,000
Other 1,742,000 3,342,000
------------ ------------
Total indebtedness 332,901,000 329,123,000
Less - current maturities (2,735,000) (553,000)
------------ ------------
Total long-term debt $330,166,000 $328,570,000
============ ============
</TABLE>
- ----------------
9
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(a) On February 17, 1994, a subsidiary of PHC issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes") and collateralized by a first mortgage on the Sands.
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only is payable during the
first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 will become due on each interest payment date. The
10 7/8% First Mortgage Notes are redeemable at the option of the issuer, in
whole or in part, on or after January 15, 1999 at stated redemption prices
ranging up to 104.08% of par plus accrued interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of PHC to pay dividends to PHC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and, commencing in 1994, requires that
a minimum of $7,000,000 be expended for property and fixture renewals,
replacements and betterments at the Sands, subject to increases of five
percent per annum thereafter.
(b) On February 17, 1994, a subsidiary of PHC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the
PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are
redeemable at the option of the issuer, in whole or in part, on or after
April 15, 1999 at stated redemption prices ranging up to 104.36% of par
plus accrued interest. The indenture for the PRT Funding Notes contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of PHC to pay dividends to PHC, to merge, consolidate
or sell substantially all of their assets or to incur additional
indebtedness beyond certain limitations. The indenture also contains
certain cross default provisions with respect to the 10 7/8% First Mortgage
Notes described in (a) above.
(c) On February 17, 1994, PRT Funding Corp., a subsidiary of PHC, issued
$15,000,000 of junior subordinated notes (the "Junior Subordinated Notes")
to HCC. Principal totaling $6,262,000 with respect to the Junior
Subordinated Notes was subsequently assigned to PHC by HCC in recognition
of tax net operating losses of PHC used by HCC (see Note 4). The Junior
Subordinated Notes are due in February 2005 and bear interest at the rate
of 14 5/8% per annum which, subject to a PHC subsidiary meeting certain
financial coverage and other payment restriction tests required by the
indenture for the PRT Funding Notes, is payable semiannually commencing
August 17, 1994. Because the PHC subsidiary had not met the financial
coverage tests, interest was not paid on the February and August 1996
interest payment dates.
(d) On February 17, 1994, PPI Funding Corp., a newly formed subsidiary of PHC,
issued $40,524,000 discounted principal amount of new deferred interest
notes (the "PPI Funding Notes") to HCC in exchange for the $38,779,000
principal amount of 15 1/2% unsecured notes held by HCC and issued by PCPI
Funding Corp., a subsidiary of PHC (the "PCPI Notes"). The increased
principal amount of the new notes included a call premium on the exchange
($1,745,000) equal
10
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
to 4 1/2% of the principal amount of PCPI Notes exchanged; such premium was
paid to all third party holders of $58,364,000 principal amount of PCPI
Notes concurrently redeemed. The PPI Funding Notes were discounted to
yield interest at the rate of 14 7/8% per annum and had an original face
value of $110,636,000. Subsequent principal payments by PPI Funding Corp.
have reduced the maturity value of the notes to $98,353,000. Payment of
interest is deferred through February 17, 2001 at which time interest will
become payable semiannually, with the unpaid principal balance due on
February 17, 2006. The PPI Funding Notes are collateralized by a pledge of
all of the common stock of a subsidiary of PHC.
Scheduled payments of long-term debt as of September 30, 1996 are set
forth below:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 57,000
1997 3,127,000
1998 5,068,000
1999 5,074,000
2000 5,079,000
Thereafter 360,428,000
------------
Total $378,833,000
============
</TABLE>
Interest paid amounted to $26,018,000 and $25,805,000, respectively,
during the nine month periods ended September 30, 1996 and 1995.
(4) INCOME TAXES
Components of PHC's benefit for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
1996 1995 1996 1995
------------ --------- --------- ----------
<S> <C> <C> <C> <C>
Federal income tax benefit $ - $ - $ - $ -
State income tax benefit (provision):
Current (1,299,000) (675,000) (67,000) (1,243,000)
Deferred (158,000) 210,000 (51,000) 501,000
----------- --------- --------- -----------
$(1,457,000) $(465,000) $(118,000) $ (742,000)
=========== ========= ========= ===========
</TABLE>
PHC is included in HCC's consolidated federal income tax return.
Pursuant to agreements between HCC and PHC, PHC's provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. In addition, HCC compensates PHC for its
use of PHC's available tax net operating loss carryforwards ("NOL's"). No
federal income taxes were paid for the nine month periods ended September 30,
1996 and 1995. PHC paid state income taxes totaling $114,000 and $85,000,
respectively, during the nine month periods ended September 30, 1996 and 1995.
11
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current annual period and reflect
the nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses.
Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
PHC and its subsidiaries have NOL's for federal tax purposes totaling
approximately $79,000,000 of which approximately $64,000,000 do not begin to
expire until the year 2003. Additionally, PHC and its subsidiaries have various
tax credits available totaling approximately $3,400,000, most of which expire by
the year 2002. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109") requires that the tax benefit of such NOL's and
credit carryforwards be recorded as an asset and, to the extent that management
can not assess that the utilization of all or a portion of such NOL's is more
likely than not, a valuation allowance should be recorded. Due to losses
sustained for both financial and tax reporting by PHC and its subsidiaries
through the third quarter of 1996, management was unable to determine that
realization of such asset was more likely than not and, thus, has provided
valuation allowances for the entire deferred tax asset for all periods
presented.
Sales or purchases of PHC or HCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of PHC to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of annual
loss carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect PHC's utilization of its loss carryforwards.
12
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 29,551,000 $ 20,668,000
Allowance for doubtful accounts 6,552,000 6,830,000
Investment and jobs tax credits 3,373,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,336,000 3,165,000
Other liabilities and accruals 2,908,000 2,455,000
Other 2,014,000 1,377,000
------------ ------------
Total deferred tax assets 47,734,000 38,912,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,039,000) (8,555,000)
Other (597,000) (695,000)
------------ ------------
Total deferred tax liabilities (8,636,000) (9,250,000)
------------ ------------
Net deferred tax asset 39,098,000 29,662,000
Valuation allowance (39,098,000) (29,662,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
Receivables and payables in connection with the aforementioned tax
allocation agreements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred income taxes - current $ 1,374,000 $ 1,950,000
Other noncurrent liabilities (1,374,000) (1,950,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
PHC operated, prior to its sale in September 1996, the Holiday Inn
located at the north entrance of the Dallas/Fort Worth Airport ("DFW North")
which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family. During 1996 and 1995, PHC
made payments for property improvements under the hotel operating agreement
totaling $2,581,000.
13
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PHC was also obligated by the hotel operating agreement to make minimum rental
payments equal to Metroplex's principal and interest payments on the underlying
indebtedness of this hotel. During February 1994, PHC utilized funds borrowed
from HCC to purchase such underlying indebtedness with a principal balance of
$13,756,000 from third parties at a cost of $6,750,000 and subject to third
party indebtedness amounting to $2,706,000. The required minimum rental
payments (net of debt service receipts) amounted to $133,000 during each of the
three month periods ended September 30, 1996 and 1995 and $398,000 during each
of the nine month periods ended September 30, 1996 and 1995. PHC recorded the
note receivable from Metroplex, which accrued interest at the rate of 9 1/2% per
annum, at acquisition cost; such note was included in notes receivable in the
accompanying consolidated balance sheet at December 31, 1995.
Upon the sale of the hotel by Metroplex, PHC received proceeds
sufficient to repay the third party indebtedness of $1,873,000, recover its
$6,750,000 acquisition cost of the underlying indebtedness, recover $2,581,000
of its total investment in property improvements and receive additional cash of
approximately $775,000.
Pursuant to a management agreement, Pratt Management, L.P. ("PML"), a
limited partnership wholly owned by PHC, earns a base management fee from
Hollywood Casino - Aurora, Inc. ("HCA"), an HCC subsidiary, equal to 5% of the
Aurora Casino's operating revenues (as defined in the agreement) subject to a
maximum of $5.5 million annually, and an incentive fee equal to 10% of gross
operating profit (as defined in the agreement to generally include all revenues,
less expenses other than depreciation, interest, amortization and taxes). Such
fees totaled approximately $2,339,000 and $2,716,000, respectively, during the
three month periods ended September 30, 1996 and 1995 and $6,810,000 and
$6,588,000, respectively, during the nine month periods ended September 30, 1996
and 1995. Unpaid fees amounting to $1,864,000 and $2,177,000, respectively, are
included in due from affiliates in the accompanying consolidated balance sheets
at September 30, 1996 and December 31, 1995.
Pursuant to a ten-year consulting agreement with Hollywood Casino -
Tunica, Inc. ("HCT"), the HCC subsidiary which owns and operates the Tunica
Casino, a subsidiary of PHC receives monthly consulting fees of $100,000. The
PHC subsidiary earned total fees of $300,000 for each of the three month periods
ended September 30, 1996 and 1995 and $900,000 for each of the nine month
periods September 30, 1996 and 1995.
HCC is obligated under the terms of an administrative services
agreement to pay PHC $50,000 per month. In addition, PHC and its subsidiaries
share certain general and administrative costs with HCC. Net allocated costs and
fees charged from HCC to PHC amounted to $590,000 and $1,884,000, respectively,
during the three and nine month periods ended September 30, 1996 and net amounts
charged to HCC by PHC amounted to $63,000 and $238,000, respectively, during the
three and nine month periods ended September 30, 1995. In connection with such
allocated costs and fees, payables in the amount of $193,000 and $210,000 are
included in due to affiliates, respectively, in the accompanying consolidated
balance sheets at September 30, 1996 and December 31, 1995.
14
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCT and Advanced Casino Systems Corporation ("ACSC"), a PHC
subsidiary, entered into a Computer Services Agreement dated as of January 1,
1994. The agreement has a term of three years and provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$30,000 a month. HCT also reimburses ACSC for its direct costs and expenses
incurred under this agreement. Total charges incurred under such agreement
amounted to $97,000 and $171,000, for the three month periods ended September
30, 1996 and 1995 and $409,000 and $429,000, respectively, for the nine month
periods ended September 30, 1996 and 1995. HCA also receives certain computer-
related services from PHC subsidiaries including hardware, software, and
operator support. HCA reimburses PHC for its direct costs and any expenses
incurred. Such costs totaled $121,000 and $44,000, respectively, for the three
month periods ended September 30, 1996 and 1995 and $201,000 and $583,000,
respectively, during the nine month periods ended September 30, 1996 and 1995.
Greate Bay Hotel and Casino, Inc. ("GBHC"), the PHC subsidiary which
owns and operates the Sands, performs certain administrative and marketing
services on behalf of HCT and HCA. During the three month periods ended
September 30, 1996 and 1995, fees charged by GBHC for such services totaled
$321,000 and $149,000, respectively. Such fees totaled $911,000 and $538,000,
respectively, during the nine month periods ended September 30, 1996 and 1995.
Interest expense with respect to borrowings from HCC is set forth
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes held
by HCC (Note 3) $1,845,000 $1,656,000 $5,378,000 $5,043,000
Junior Subordinated Notes (Note 3) 320,000 321,000 958,000 956,000
Short-term borrowings (Note 2) 181,000 215,000 607,000 637,000
</TABLE>
During 1994, a newly formed PHC subsidiary issued $40,524,000
discounted principal amount of PPI Funding Notes in exchange for the PCPI Notes
held by HCC (see Note 3). Accretion of interest on the PPI Funding Notes is
included in the outstanding note payable balances at September 30, 1996 and
December 31, 1995.
Interest accrued on short-term borrowings at September 30, 1996 and
December 31, 1995 amounting to $50,000 and $23,000, respectively, is included in
interest payable on the accompanying consolidated balance sheets together with
interest on the Junior Subordinated Notes amounting to $1,434,000 and $476,000,
respectively, at September 30, 1996 and December 31, 1995.
15
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) LITIGATION
PHC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact upon the consolidated financial position or results of
operations of PHC and its subsidiaries. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above.
(7) SUBSEQUENT EVENTS
During the fourth quarter of 1996, an unconsolidated partnership in
which PHC holds a 50% interest entered into a contract for the sale of a hotel
in Orlando, Florida subject to a 21-day inspection period by the buyer. Upon
completion of the sale, PHC will be required to pay approximately $2,300,000 to
retire its share of the underlying indebtedness on the property.
Also during the fourth quarter of 1996, another unconsolidated
partnership in which a PHC subsidiary holds a 50% interest entered into an
agreement for the sale of a casino/hotel in San Juan, Puerto Rico owned by the
partnership and managed by a PHC subsidiary. PHC will receive a fee with
respect to the termination of its management agreement; however, no significant
gain or loss is anticipated with respect to the sale transaction.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
16
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
PHC's consolidated net revenues decreased to $76.4 million and $220.2
million, respectively, during the third quarter and first nine months of 1996
from $83.4 million and $231.7 million, respectively, for the third quarter and
first nine months of 1995. Income from operations amounted to $4 million and
$3.2 million, respectively, during the third quarter and first nine months of
1996 compared to income from operations of $11.9 million and $27.9 million,
respectively, during the 1995 periods. The decline in operating results is
attributable to decreases experienced at the Sands as discussed below.
The Sands earned income from operations of $2.5 million and sustained a
loss from operations of $2.4 million, exclusive of management fees paid to NJMI,
respectively, for the three and nine month periods ended September 30, 1996.
These results compare to income from operations of $9.6 million and $22.2
million, respectively, reported for the 1995 periods. Operating results were
adversely affected in 1996 by the advent of unprecedented and highly aggressive
marketing programs instituted by certain other Atlantic City casinos seeking to
increase their market share together with record winter snowstorms in January
and weekend snowstorms in February. These factors, as well as declines in both
the table games and slot machine hold percentages, resulted in three and nine
month declines in net revenues of 8.3% and 5.5%, respectively, (to $71.7 million
and $205.2 million in 1996 from $78.2 million and $217.1 million in 1995). In
addition, marketing and advertising costs increased by $1.2 million and $10.7
million (7% and 22.8%), respectively, during the third quarter and first nine
months of 1996 compared to the same periods of 1995 in response to competitive
pressures.
17
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 21,170 $ 24,978 $ 61,750 $ 72,521
Slot machines 43,663 46,038 123,934 126,616
Other (1) 987 1,219 3,051 3,434
-------- -------- ---------- ----------
Total $ 65,820 $ 72,235 $ 188,735 $ 202,571
======== ======== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $161,052 $170,245 $ 444,435 $ 463,555
======== ======== ========== ==========
Hold Percentages: (3)
Sands 13.1% 14.7% 13.9% 15.6%
Atlantic City Casino
Gaming Industry 15.2% 15.7% 15.5% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $535,346 $521,596 $1,510,865 $1,459,882
======== ======== ========== ==========
Hold Percentage:(3)
Sands (4) 8.2% 8.8% 8.2% 8.7%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is not
available.
Table games drop at the Sands declined $9.2 million (5.4%) and $19.1
million (4.1%), respectively, during the three and nine month periods ended
September 30, 1996 compared with the same periods of 1995. The Sands' decreases
compare with increases of 6.6% and 5.9% in table drop for all other Atlantic
18
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
City casinos during the same periods. As a result, the Sands' table game market
share (expressed as a percentage of the Atlantic City industry aggregate table
game drop) decreased to 7.6% and 7.9%, respectively, during the three and nine
month periods ended September 30, 1996 from 8.5% and 8.6%, respectively, during
the same periods of 1995. Table game drop throughout the nine month period was
adversely impacted by the increase in competitive pressures in the rated table
market segment, of which a significant portion was in the "high end" and mid-
market segments. The third quarter of 1996 also saw a decline in the unrated
table market segment as expansions at competing properties, construction on
roadways into the city and other factors all served to reduce unrated table play
at the Sands.
Slot machine handle increased $13.8 million (2.6%) and $51 million (3.5%),
respectively, during the three and nine month periods ended September 30, 1996
compared with the same periods of 1995. The Sands' increases compare with 2.4%
and 5.5% increases in slot machine handle for all other Atlantic City casinos.
As a result, the Sands' maintained its market share of 6% during the third
quarter of 1996 compared to 1995; however, its market share decreased slightly
to 6.2% from 6.3% during the nine months ended September 1996 compared to the
same period in 1995. The increases in slot machine handle are largely
attributable to increases in marketing programs, such as coin incentive and
direct marketing programs, which have resulted in significant increases in the
number of bus patrons for the nine months ended September 30, 1996 compared to
1995. The Sands' average number of slot machines increased .9% during the first
nine months of 1996 compared to an increase of 9.2% for all other Atlantic City
casinos. The greater percentage increase in the number of slot machines for
other Atlantic City casinos reflects, in part, expansions of certain facilities
during 1996 which resulted in an overall increase of approximately 118,000
square feet of casino space and further contributed to the Sands' decline in
market share.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $6.4 million (8.9%) and $13.8 million (6.8%),
respectively, for the three and nine month periods ended September 30, 1996
compared with the same periods of 1995. Casino revenues were negatively
impacted by the decline in table game wagering as discussed previously and by
decreases in both the table games and slot machine hold percentages at the Sands
during the 1996 periods compared to the 1995 periods.
Rooms revenue did not change significantly during the three and nine month
periods ended September 30, 1996 compared with 1995. Food and beverage revenues
decreased $754,000 (7.3%) for the three month period ended September 30, 1996
compared with the 1995 period primarily due to the decline in patron volume at
the Sands; such revenues increased $1.9 million (7.2%) for the nine month period
ended September 30, 1996 compared with the prior year period primarily as a
result of the opening of the Sands' Epic Buffet during the third quarter of
1995. Other revenues decreased $202,000 (4.1%) during the three month period
ended September 30, 1996 and increased $1.8 million (14.6%) during the nine
month period ended September 30, 1996 compared to the same periods in 1995.
Increases in theater entertainment revenue at the Sands in 1996 were offset
during the third quarter by a decrease in management fees earned with respect to
the Aurora Casino.
19
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 55.8% and 56.8%, respectively, during the three
and nine month periods ended September 30, 1996 from 57.1% and 58.3% during the
third quarter and first nine months of 1995. Such decreases are primarily
attributable to increases in other types of marketing programs in lieu of
promotional allowances.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands remained flat during the third quarter of 1996
compared to 1995 and increased $12.1 million (7.7%) during the nine month period
ended September 30, 1996 compared to the same period in 1995. The nine month
increase is primarily due to the expansion of various marketing programs,
particularly coin incentive programs, in response to competitive pressures. The
additional costs of such programs result in greater allocation of rooms, food
and beverage and other expenses to casino expense.
Rooms expense did not change significantly during the third quarter or
first nine months of 1996 compared to the same periods in 1995. Food and
beverage expense did not change significantly during the three month period
ended September 30, 1996 compared to the three month period ended September 30,
1995. The increase of $1.2 million (14.7%) in food and beverage expense during
the nine month period ended September 30, 1996 compared to the same period in
1995 reflects increased costs associated with the Epic Buffet which were
partially offset by increases in marketing programs, the costs of which are
allocated to the casino department. Other expenses increased $838,000 (92.8%)
and $1 million (38.5%), respectively, during the three and nine month periods
ended September 30, 1996 compared with the same periods in 1995 as increases in
theater entertainment costs at the Sands were partially offset by increased
allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $382,000 (7.7%) and $1.6
million (9.5%), respectively, during the third quarter and first nine months of
1996 as compared to 1995. These decreases are primarily due to decreases in
equipment rental and legal expenses at the Sands and, to a lesser extent,
reductions in payroll costs associated with NJMI's management of the Sands.
INTEREST
Interest income decreased $161,000 (25.8%) and $229,000 (12.8%),
respectively, during the three and nine month periods ended September 30, 1996
compared with the same periods of 1995 due to a decrease in the amount of cash
available for temporary cash investments. Interest expense did not change
significantly during the three and nine month periods ended September 30, 1996
compared to the prior year periods.
20
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LOSS ON SALE OF ASSETS
During the third quarter of 1996, PHC realized a loss of $625,000 with
respect to the sale of a hotel it operated under a joint operating agreement
with Metroplex Hotel Limited, a partnership controlled by certain members of the
Pratt Family. The loss resulted from the write off of certain leasehold
improvements and fixed assets which PHC purchased for the hotel under terms of
the operating agreement.
INCOME TAX PROVISION
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $79 million of which approximately $64 million
do not begin to expire until the year 2003. Additionally, PHC and its
subsidiaries have various tax credits available totaling approximately $3.4
million, many of which expire by the year 2002. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" requires that the
tax benefit of such NOL's and credit carryforwards be recorded as an asset and,
to the extent that management can not assess that utilization of such NOL's is
more likely than not, a valuation allowance should be recorded. Due to losses
sustained for both financial and tax reporting by PHC and its subsidiaries
through the third quarter of 1996, management was unable to determine that
realization of such asset was more likely than not and, thus, provided valuation
allowances for the entire deferred tax asset for all periods presented.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of PHC's operations for the first and fourth quarters are traditionally
less profitable than the other quarters of the fiscal year. Furthermore, the
Aurora Casino has also experienced seasonality, but to a lesser degree than the
Sands, and, as a result, the management fees earned have fluctuated with such
seasonality. In addition, the Sands' and the Aurora Casino's operations may
fluctuate significantly due to a number of factors, including chance. Such
seasonality and fluctuations may materially affect PHC's casino revenues and
profitability.
21
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
PHC's principal assets and sources of revenues are the Sands and management
and consulting contracts with the Aurora Casino and the Tunica Casino. A PHC
subsidiary receives a base management fee equal to 5% of operating revenues (as
defined in the management agreement) subject to a maximum of $5.5 million
annually, and an incentive fee equal to 10% of gross operating profit (as
defined in the management agreement) from the operation of the Aurora Casino.
Management fees received during the nine month period ended September 30, 1996
amounted to $7.1 million. During 1994, a subsidiary of PHC entered into a
consulting agreement with HCT with respect to the Tunica Casino which provides
for the payment of $1.2 million annually by the Tunica Casino to the subsidiary
for consulting services and for reimbursement of direct costs and expenses
incurred.
The Sands' earnings before depreciation, interest, amortization, taxes and
intercompany management fees have been sufficient to meet its debt service
obligations (other than certain maturities of principal that have been
refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.
During the first nine months of 1996, PHC's net cash used in operating
activities (after net interest expense and income taxes) amounted to $5.9
million compared with cash provided by operating activities of $23.6 million
during the same period of 1995. The change in net cash from operating
activities compared to 1995 resulted primarily from a decline in operating cash
flow generated by the Sands. The Sands sustained an operating cash flow deficit
of $10.6 million for the nine months ended September 30, 1996 compared to net
cash generated from operations of $13.4 million during the 1995 period,
resulting in an aggregate decline in operating cash flow of $24 million and a
decline in working capital of $25.4 million compared to September 30, 1995. PHC
utilized existing cash together with proceeds from the repayment of an
outstanding note receivable, borrowings on GBHC's short-term credit facility and
net borrowings from HCC during the nine month period ended September 30, 1996 to
meet its operating needs, to fund capital additions ($7.2 million) and to make
obligatory investments at the Sands ($2.2 million).
In prior years, PHC's hotel operations required substantial infusions of
operating funds; however, the disposition of substantially all of its hotel
properties has greatly reduced the cash required to fund hotel operations (see
"Capital Expenditures and Other Investments" below) .
22
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FINANCING ACTIVITIES
During February 1994, PHC completed the refinancing of virtually all of its
casino-related outstanding debt. The refinancing was completed through a public
offering of $270 million of debt securities consisting of $185 million of 10
7/8% First Mortgage Notes due January 15, 2004 and $85 million of 11 5/8% PRT
Funding Notes due April 15, 2004. Proceeds from the debt offerings were used,
in part, to refinance outstanding mortgage notes on the Sands and other
indebtedness scheduled to mature in 1994, to repay $58.4 million of the other
publicly held indebtedness and to provide partial funding for an expansion of
gaming space at the Sands. During the first nine months of 1996, PHC repaid
long-term indebtedness of $422,000. Scheduled maturities of long-term debt
during the remainder of 1996 are $57,000. Commencing in July 1997, semiannual
principal payments of $2.5 million will become due with respect to the 10 7/8%
First Mortgage Notes.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of September 30, 1996, $2 million was outstanding under
the line of credit.
During the third quarter of 1996, PHC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. PHC loaned such funds to GBHC on similar terms. Also during
the third quarter of 1996, PHC repaid $4.8 million it previously borrowed from
HCC with respect to the purchase of the underlying indebtedness of a non-casino
hotel property it operated (see below).
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first nine months of 1996
totaled $7.2 million, of which capital expenditures at the Sands amounted to
approximately $4.7 million. Expenditures by PHC during the first nine months of
1996 of approximately $2.6 million for property improvements at a non-casino
hotel property it operated under an agreement with Metroplex Hotel Limited (see
Note 5 of Notes to Consolidated Financial Statements) were repaid in September
1996 upon the sale of the hotel. Management anticipates capital expenditures
during the remainder of 1996 will be approximately $1 million at the Sands.
Projects currently planned during the remainder of 1996 include additional
upgrades and improvements to rooms at the Sands, including its higher-end suite
product, and other departmental expenditures.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first nine months of 1996 totaled $2.2
million and are anticipated to be approximately $800,000 during the remainder of
1996.
PHC agreed to contribute up to $3.9 million, approximately $2.5 million of
which has been paid as of September 30, 1996, as an additional investment in an
unconsolidated hotel partnership to refurbish the hotel facility in Orlando,
Florida. No such payments were required during the nine month period ended
September 30, 1996. Such contributions were in recognition of PHC's partner
having agreed to make
23
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
$5 million in principal reductions on the underlying mortgage note on the
facility of which $4 million has been made to date. During October 1996, the
partnership entered into a contract for the sale of the hotel facility. Upon
completion of the sale, it is anticipated that PHC will be required to pay
approximately $2.3 million to retire its share of the underlying indebtedness on
the property.
Also during the fourth quarter of 1996, another unconsolidated partnership
in which a PHC subsidiary holds a 50% interest entered into a contract for the
sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and
managed by a PHC subsidiary. Under terms of the sales agreement, the PHC
subsidiary will receive a fee with respect to the termination of its management
agreement.
SUMMARY
As previously discussed, the Sands sustained a significant cash flow
deficit from operations during the nine month period ended September 30, 1996
and required additional cash from affiliate borrowings and its line of credit to
meet its financial obligations.
In order to fund its future cash requirements, including debt service and
obligatory investments, the Sands will need to achieve substantially improved
operating results or rely on additional borrowings from affiliates. It appears
that absent any further material deterioration of operating results, the Sands
will be able to rely on borrowings from affiliates to meet its obligations in
the near term; however, its long-term financial viability is dependent on a
substantial improvement in operating results of the Sands as its affiliates have
certain limitations on their ability to provide ongoing financial support.
During the third quarter of 1996, PHC engaged a major Wall Street
investment banking firm as its financial advisor to explore strategic
transactions regarding the Sands including, among other things, the potential
consummation of strategic alliances including joint ventures for the possible
expansion of the Sands.
24
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrant did not file any reports on Form 8-K during the quarter ended
September 30, 1996.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRATT HOTEL CORPORATION
Date: November 12, 1996 By: /s/ John C. Hull
----------------------------- --------------------------------
John C. Hull
Corporate Controller
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT HOTEL CORPOATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 24,816 24,816
<SECURITIES> 0 0
<RECEIVABLES> 26,730 26,730
<ALLOWANCES> 15,288 15,288
<INVENTORY> 4,024 4,024
<CURRENT-ASSETS> 50,188 50,188
<PP&E> 317,934 317,934
<DEPRECIATION> 158,665 158,665
<TOTAL-ASSETS> 227,821 227,821
<CURRENT-LIABILITIES> 50,211 50,211
<BONDS> 330,166 330,166
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (164,728) (164,728)
<TOTAL-LIABILITY-AND-EQUITY> 227,821 227,821
<SALES> 0 0
<TOTAL-REVENUES> 76,397 220,172
<CGS> 0 0
<TOTAL-COSTS> 61,961 184,760
<OTHER-EXPENSES> 10,371 31,278
<LOSS-PROVISION> 668 1,562
<INTEREST-EXPENSE> 9,611 28,248
<INCOME-PRETAX> (6,214) (25,676)
<INCOME-TAX> 1,457 118
<INCOME-CONTINUING> (7,671) (25,794)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,671) (25,794)
<EPS-PRIMARY> (1.48) (4.97)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT HOTEL CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 27,535 27,535
<SECURITIES> 0 0
<RECEIVABLES> 29,283 29,283
<ALLOWANCES> 16,534 16,534
<INVENTORY> 4,129 4,129
<CURRENT-ASSETS> 54,193 54,193
<PP&E> 319,723 319,723
<DEPRECIATION> 149,427 149,427
<TOTAL-ASSETS> 250,282 250,282
<CURRENT-LIABILITIES> 43,394 43,394
<BONDS> 327,085 327,085
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (134,976) (134,976)
<TOTAL-LIABILITY-AND-EQUITY> 250,282 250,282
<SALES> 0 0
<TOTAL-REVENUES> 83,438 231,716
<CGS> 0 0
<TOTAL-COSTS> 60,774 169,749
<OTHER-EXPENSES> 9,995 31,795
<LOSS-PROVISION> 726 2,263
<INTEREST-EXPENSE> 9,135 27,496
<INCOME-PRETAX> 2,808 413
<INCOME-TAX> 465 742
<INCOME-CONTINUING> 2,343 (329)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,343 (329)
<EPS-PRIMARY> .45 (.06)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT HOTEL CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 28,067
<SECURITIES> 0
<RECEIVABLES> 28,789
<ALLOWANCES> 16,496
<INVENTORY> 4,462
<CURRENT-ASSETS> 53,909
<PP&E> 317,808
<DEPRECIATION> 148,531
<TOTAL-ASSETS> 250,116
<CURRENT-LIABILITIES> 45,931
<BONDS> 328,570
0
0
<COMMON> 519
<OTHER-SE> (138,934)
<TOTAL-LIABILITY-AND-EQUITY> 250,116
<SALES> 0
<TOTAL-REVENUES> 303,793
<CGS> 0
<TOTAL-COSTS> 221,522
<OTHER-EXPENSES> 47,692
<LOSS-PROVISION> 2,988
<INTEREST-EXPENSE> 35,978
<INCOME-PRETAX> (4,387)
<INCOME-TAX> (100)
<INCOME-CONTINUING> (4,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,287)
<EPS-PRIMARY> 0
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